This is an extremely difficult question to address because of a lack of primary sources linking supernatural beings with Jews and because of the ambiguity of terms used by the pre-industrial folk. So, I will answer this by looking first at the knockers of Cornwall, underground spirits with clear Jewish attribution and then by considering dwarves in general – who they were and what the term means.

I’ll need to break this up into two entries, so in this first, I will discuss the case of the Cornish knockers and their Jewish affiliation, and then in the second, I will discuss the nature of the dwarves and how all this casts light – or does not – on the question of Jewish affiliation of the supernatural beings in general (and how authors including Tolkien may have view this).

The Cornish were famous for millennia for mining, and they appear to have populated their underground work environment early on with supernatural co-workers. The sources that documented them from the nineteenth century frequently ascribed them with a Jewish connection. I addressed this in a previous century with the following: Ronald M. James, ‘Knockers, Knackers, and Ghosts: Immigrant Folklore in the Western Mines’, Western Folklore Quarterly, 51:2 (April 1992) 153-76. I have also discussed this with augmented research in a book manuscript, “The Folklore of Cornwall,” which is currently under review. Here are a few excerpts:

In 1851, Charles Kingsley published Yeast: A Problem, in which his character, Tregarva (a clear attempt to refer to a Cornish name), answers Sir Lancelot’s question ‘What are the Knockers?’ Tregarva replies that ‘They are the ghosts, the miners hold, of the old Jews, sir, that crucified our Lord, and were sent for slaves by the Roman Emperors to work the mines, and we find their old smelting-houses, which we call Jews’ houses and their blocks of tin, at the bottom of the great bogs, which we call Jews’ tin.’

Most Cornish sources suggest that knockers were believed to be spirits of Jews who laboured underground long ago. Local tradition maintained that Jews worked in Cornish mines during the medieval period, but there is no historical basis for this belief. Bottrell, Hunt, Evans-Wentz, and Wright all suggest that the prominent folk belief was that Jews were exiled to the mines presumably for their alleged part in the Crucifixion.

In keeping with the idea that knockers were spirits of Jewish miners, the Cornish maintained that the creatures did not work on Saturdays, which was their Sabbath. Contrary to this belief, however, the Cornish also maintained that the knockers did not work on Easter, All Saints’ Day, and Christmas, at which time they sang carols and held a Christmas Mass deep within the mines. Additional motifs include the observation that ‘Jews’ bowels’ referred to small pieces of tin in old smelting works; ‘Jews’ houses’ meant archaic smelting works; ‘Jews’ leavings’ were mine refuse; and ‘Jews’ pieces’ were ancient blocks of tin. There is little variation in the traditions surrounding the Jewish origin of the knockers, which seems to be the predominant folk explanation. Jenkin asserted that some Cornish miners may have also believed that the knockers were the spirits of pre-Celtic miners, but he is the only one to record this idea. The fact that they believed in a Jewish origin of the knockers found its way into the fiction of Kingsley as early as 1851 underscores the importance of this tradition.

Anthropologist Paul Manning put forward a provocative treatment of knocker folklore, focusing on the asserted Jewish origin of the entities. He maintains that ‘the Jews became by turns ghosts, fairies and then nothing at all.’ The intent here is not to diminish Manning’s work, which contributes an enormous amount with his intense consideration of the meaning of this Jewish motif. Nevertheless, examining the knockers in the context of other northern and western European beliefs places the idea of a Jewish origin in a different context. (Paul Manning, ‘Jewish Ghosts, Knackers, Tommyknockers, and other Sprites of Capitalism in the Cornish Mines’, Philip Payton, editor, Cornish Studies: Second Series, Thirteen (Exeter: University of Exeter, 2005) 216-55)

The Cornish believed that the eerie environment of the mine was populated with a specialised type of supernatural being of nature. They then considered the origin of these creatures. They almost certainly did not begin with a belief in an ancient Jewish population associated with mining that somehow devolved into supernatural beings. Manning is correct to ask why Cornish knockers became so closely linked with Jews, and he is free to construct ways to place this association in perspective with regard to the development of capitalism. The Jewish association of the knockers is yet another unique Cornish fingerprint in the realm of European folklore. But it is an after-the-fact conjecture on the part of the folk, rather than a point of origin in itself. The knockers began as supernatural beings of nature, and the folk – as they did throughout Europe – blended them with ghosts and other traditions as they tried to make sense of what they regarded as the extraordinary in their midst.

The Jewish folk explanation for knockers should not mask the fact that these entities act like and are assumed to be a kind of fairy attached to a specific occupation. The knockers can be understood as underground supernatural beings who attracted an array of legends and beliefs associated with the mistaken idea that there were once ancient Jewish miners in Cornwall. Like many other European fairies, the knockers show a muddling of the distinction between ghosts (particularly of the long dead) and elves.

In summary, the Cornish belief in knockers included the idea that they were the spirits of Jews who had laboured underground, most likely as a form of punishment for their imagined role in the Crucifixion. Knockers were diminutive and elf-like and they observed the Jewish Sabbath and several Christian holidays by abstaining from work. The mine spirits punished curiosity and greed and rewarded people who treated them kindly. They could be mischievous and were easily offended. Knockers did not like whistling or being watched. Their knocking could lead miners to wealth or it could warn of danger.

I'd also be interested in whether and when other ethnicities have been associated with dwarfs (other than Scottish people, already covered last week).

Sortof. In the 1890s the Welsh writer Arthur Machen began writing stories involving a race of "Little People," starting with "The Novel of the Black Seal" in The Three Impostors, or, The Transmutations (1895) - this wasn't quite Celtic Renaissance fare a la William Butler Yeats; it was a darker, almost anthropological take on "fairies" as a race of primitive survivals, who although seldom described directly are attributed yellow skin and almond-shaped "Mongolian" eyes. Machen was drawing on the theories of Scottish folklorist David MacRitchie, particularly Fians, Fairies and Picts (1893), an euheumerist who argued that "fairies" were a diminutive Neolithic race.

The idea was taken up and expanded by American writers H. P. Lovecraft and Robert E. Howard in the 1930s, with Lovecraft tying it in to Margaret Murray's book The Witch-Cult in Western Europe (1922), postulating the witch-cult as a survival of the religious rites of this diminutive race (which tied it in nicely with Machen's story "The White People"). Lovecraft expands this at some length in his letters, one of which (dated 23 Septemeber 1932) was excerpted as the essay "Some Backgrounds of Fairyland", first published in Marginalia (1944), 174-183. Here's a relevant portion of that essay:

Such earthy or underground spirits have, in European folklore, a peculiar set of fixed, special qualities in no way to be traced to the general night-daemon myth. They are conspicuously small, conspicuously repulsive, consistently subterranean in habitat, generally primitive in their arts and crafts, usually hostile or fearful toward human beings, and given to certain definite practices such as the theft of human infants accompanied by the substitution of their own. They have a profound lore connected with nature, and indulge in secret communal rites varying from the merely grotesque to the unutterably repulsive. Their weapons are generally bows with primitive stone-headed arrows.

Viewing all the evidence, anthropologists have for many generations felt certain that these persistent elfin or fairy characteristics are due to historic memory rather than to mythological imagination. That is, the traditional elf, troll, gnome, kobold, leprechaun, brownie, or imp is not purely an Aryan night-daemon, but a synthesis of the night-daemon with a very genuine dwarf or pigmy race of men whom the Aryans at one time or another displaced and drove into underground hiding, and who afterward kept up a furtive and vindictive course of reprisals against their conquerors.

Driven underground, decimated in numbers, and hunted down whenever seen, the vanquished dwarfs became sly creatures of the night—sallying forth by stealth to waylay lone travelers, steal infants for nameless sacrifices, despoil lonely farm houses, shoot from ambush, and otherwise vent their hatred of their Aryan conquerors. In time it is certain that many Aryan renegades went over to them and joined their number—as men in savage places “go native” today—and that they succeeded in inculcating their repulsive system of fertility-worship amongst a decadent stratum of the Aryans, thus giving rise to the furtive Witch-Cult with its sinister organisation and ceremonies, and its obscene and orgiastic Sabbat.

Memories of these waspish, uncouth, and miniature enemies could not but be extremely vivid among the conquerors of Europe; and it is not remarkable that the creatures—so unlike men as the tall, blond Aryans conceived humanity—became blended with the ancient hereditary lore of night-daemons which antedated our ancestors’ entrance to the region. Had the Aryans not encountered this squat, dark race, it is probable that their night-daemon myths would have continued to remain in a more or less ambiguous and plastic form. To the conquered little people we undoubtedly owe the existence of elves, duergars, trolls, gnomes, and kobolds as our forefathers conceived them.

It now remains to enquire who these conquered dwarfs really were, where they lived, and when and where our invading forefathers encountered them. Also, whether the whole body of Aryans found such beings in their path, or whether the conflict was limited to a part of the Aryan people and merely reported by hearsay to the rest. We must remember that the presence of a certain legend among a certain people in a certain region by no means proves that the events of the legend really happened to that people in that particular place. The legend may have been borrowed outright from some other people—either of that region or another region—or it may concern something which happened to the given people in another place—perhaps a very distance place—which the people occupied at some earlier stage of its racial history.

In the opinion of the older mythologists, and of many modern ones, the little people of elfin lore represent none other than the squat Mongoloid stocks of northern Europe—Lapps and Finns—whom the Aryans found upon their entrance to that region. The size, colour, accomplishments, and manners of these stocks in their purest forms lend much plausibility to the hypothesis; and it is highly probable that they covered a much larger area of the European continent than is now the case. Another argument is the fact that most of the legends of small underground beings seem to come primarily from the North—from those Teutons who most directly encountered the squat Mongols in the battle for the continent.

A more modern and much bolder theory identifies our dwarfish foes of prehistoric times with the Neanderthaloid sub-men which shambled over Europe about 30,000 B.C., and which were exterminated by the successive waves of true human beings who swept into the region after that date. This theory, while vastly interesting, has much less standing than the one previously mentioned.

A third theory—taking into the account the existence of evil-dwarf legends in regions remote from the Lapp-Finn belt-(for example, the Little People of the British Isles, and the Kalli Kanzori of modern Greece, which are not wholly traceable to nature-spirits of the faun-satyr order) postulates some hitherto unknown race of dwarfs (either Mongoloid or otherwise) which populated wide areas of Europe at a very remote though not palaeolithic period. This theory has considerable vogue at the present time, and is upheld by the existence of certain prehistoric excavations in Southern Austria which seem to have been made by men of less than normal stature. At the same time it would not do to make too much of the idea, since an originally wider diffusion of the Lapp-Finn (or easterly Hunnish) stocks might easily account for dwarf architecture and artifacts in areas remote from their historic habitat. Most conservative anthropologists think it unlikely that—despite the vivid legends of diminutive Picts and elfin brownies in Scotland, tiny fairies and subterrene leprechauns in Ireland, sinister underground “little people” in Wales, and Robin Goodfellow’s merry crew in England—any miniature race has ever actually inhabited the British Isles. We derive such tales entirely from the experience of our ancestors at a former stage of migration on the European continent.

A fourth theory—the least probable of all—holds that the small, dark opponents of the Aryans were merely members of those less blond Caucasian stocks which disputed the possession of Europe at the dawn of history—Mediterranean and Iberian races whose stature and pigmentation would naturally seem aberrant to a pure Nordic. This view would of course provide for an actual meeting of Celts and “little people” in the British Isles. However, it is easy to detect the weakness of such a theory. To begin with, Mediterrneans are not small enough to be called dwarfish—certainly not small enough to inhabit the subterranean erdstalle of Southern Austria. Secondly, they are not enough unlike Nordics to give rise to the tremendous sense of alienage and repulsion evident in most legends. It is ridiculous to imagine normal, regular-featured Iberians as the models for trolls and kobolds. The most that can be said that possible some episodes of conflict betwixt Nordics and Mediterraneans may have been confused in Nordic folklore with other tales dealing with encounters with the older dwarf race. Such complexities must always be reckoned with in anthropology—indeed, we cannot swear that two, three, or four wholly different dwarf races, encountered at different times, did not play a part in forming the traditional picture of the elf, kobold, or mischievous fairy. Lapp-Finns of the north, Hunnish stocks of the southeast, unknown stocks of varied habitats, and even dark Iberians of later times may all have figured in the composite legend-building—later encounters being interpreted in terms of earlier ones, and battles on one terrain being twisted into connection with bygone battles in far different regions. Nor should it be forgotten that the purely mythical element of the night-daemon, with which the early Aryans confused their strange opponents, must always be looked for.